November 2011

11/30/2011

While hiring a professional trustee may not always be the best solution, it is almost always better to have a professional with experience managing special needs trusts serve in place of an unqualified or overwhelmed non-professional trustee.

So, you’ve created a trust to protect your loved ones. Did you name the right person as trustee? Likewise, perhaps you’ve just been asked to serve as trustee without a firm appreciation for what that means, or perhaps you’ve just figured it out. Question: Should the trust have a professional trustee?

Whether you’re parent who’s set up a trust or you’re a named trustee, Special Needs Answers recently offered a couple of tests to determine if the trust has the right trustee and if a professional may be in order. Their advice, as you would imagine, is especially poignant in the case of a special needs trust, but also has broader application.

Does the trustee have enough time? Being a trustee is not like being a god-parent; it’s almost like another job and even a full-time job for some kinds of trusts. Is the trustee able to keep up with it?

Does the trustee keep track of the rules? Every trust has various rules in place to maintain it, and even more to make sure it accomplishes its goals. In the case of a special needs trust this means keeping track of government benefit rules (even as they change, or threaten to change as in the current political climate). The trustee has to be able to do this.

Does the beneficiary make things complicated for the trustee? If the trustee knows the beneficiary directly, whether by familial relation or long acquaintance, then they also may exert more influence on the trustee than the trustee ought to allow. If the beneficiary feels entitled or wants to ask for something, they may have leverage and the trustee may cave.

Of course, these questions illustrate the common difficulties a trust and a trustee will have to face. Everyone involved ought to understand these difficulties in advance and make the right choices for all concerned.

11/29/2011

The breakdown of deficit talks in Congress will exact little pain on the U.S. healthcare industry, but it's a temporary reprieve from steeper cuts that could be put back on the table in 2013.

Have you heard the news? It seems the grand experiment failed. The Congressional supercommittee, charged with doing what the Congress at large could not do, has run out of time. And, by running out of time, failed in its mission to come up with budget cuts.

What does that mean for Medicare and Medicaid beneficiaries?

As Reuters reports, in the event the supercommittee should fail, as it has, then automatic and sweeping cuts go into effect. For Medicare, that means a two percent cut across the board, or about $123 billion over the next decade. However, it might have been $500 billion to $700 billion in cuts, if various supercommittee arguments had prevailed.

Nevertheless, as it stands, there definitely will be a little pain, but not quite as much for individual beneficiaries. No, likely it will hit hospitals and doctors the hardest. Why? In the aggregate, that’s where the money tends to end up.

Of course, we’re not yet out of the woods. Just as it became clear last summer that we’d have to wait until the winter for some kind of budget solution from Congress, it now seems that we’ll have to wait for the upcoming election season. In turn, expect things to intensify even further and for budget discussions to become all the more drastic.

11/28/2011

Not so fast: With unique assets, things aren't always straightforward. More specifically, owners of unique assets - such as family businesses, legacy real estate and valuable art, coin and other collections - need to consider specialized risk management.

When you own a small business, and especially if you and your family are the sole owners of a not-so-small business, it’s important to remember that personal planning and financial planning are not separate activities. Unique assets call for comprehensive planning; whether legacy real estate or a valuable collection, but this is especially true if the asset is a business.

Financial Planning recently ran a piece on this very issue and I thought it was worth passing along. According to the author, you likely practice some form of risk management in your business. In fact, you probably know all too well that things don’t always go along as planned, and, when Murphy’s Law strikes, there’s a great deal at stake. An even greater source of risk is personal when your business life, personal and family lives are one and the same. In short, you need a risk management plan for your business, yourself and your family in the form of comprehensive estate and succession planning.

The original article has much more to say on the topic, with some stories that sound all too familiar.

11/25/2011

"You often just don't know what you're going to end up with if you donate" to smaller charities, says Ken Berger, president and chief executive officer at charity evaluator Charity Navigator. You may not know "whether or not [the charity] is truly well-meaning … and whether [it] is really vetting and thoughtfully finding the greatest need out there."

Giving charitably can be a tough thing. You want to make sure your money goes as far as it can. A lot of donors choose smaller charities with less overhead to help ensure their money is used as intended and to the fullest extent. However, if you’re thinking small, it’s worth ‘digging deeper’, and not just into your pockets. No, dig deep into the charity and make sure it is as you want it to be.

The good thing about a large charity is that it’s fairly well established. For example, it has the power to complete its goals and likely it has a history that is readily examinable. The reason not to give to a big charity is that your money also will go towards funding all the bureaucracy and red-tape that have made the charity big in the first place. This can mean few dollars actually advance the charitable cause.

Conversely, smaller charities can be more efficient, but may lack those same assurances, unless you’ve done your research. Depending on your charity of choice, the local history might indicate the effectiveness of the charity. As to its value, you always can check its progress against its mission statement. What are they trying to accomplish? Do they know? How do they do so?

In addition, don’t be too bashful to ask “who’s in charge” and what they do with the donations? To help guide you through the process, try various services like the Charity Navigator ratings system, or GuideStar to determine how charities use their funds.

In the end, giving to a smaller charity may be that much more rewarding, and with all your research you might end up giving your time, too. Indeed, work first-hand can be a good way of learning and for giving back as well.

Heading into the Holiday season, with Thanksgiving at our doorstep and carolers not far behind, it’s as good a time as any to start your research and your charitable donations.

11/24/2011

A new Internal Revenue Service rule could make life trickier for most businesses that get paid with credit cards — from online retailers to the local deli.

Whether you make every deal for your business with a handshake or you fastidiously create, execute, and file away every bit of paperwork, you probably don’t like paperwork. And, you’re not alone.

Unfortunately, a new IRS rule may involve even more paperwork for you, if your business gets paid by credit cards.

As the Wall Street Journal reports, this year credit-card companies are required to track the dollar amounts that individual merchants get from credit card transactions. In turn, the credit card companies then report this information to both the IRS and the merchant on 1099-k forms. The IRS made the rule so it’s prepared, but is your business prepared?

If you’ve been reporting your income properly all along, then you have little to fear. However, it does mean a good amount of extra work if you want to be sure that the credit-card company is correct. This means an entirely new accounting protocol for which many firms are simply unprepared … and are likely unaware they’re about to face.

According to Melissa Labant, technical manager at the American Institute of CPAs, the new law "creates an administrative burden to separately account for different transactions — and to break it down month by month if they want to reconcile to the 1099-Ks they receive."

11/23/2011

Whenever making loans — to anyone — there should be a written promissory note that spells out the amount borrowed, whether interest is being charged and how repayments are to be made. It’s fine if it’s merely a demand loan and there’s no repayment schedule. But parents should also specify, in their wills or trusts, how the loan should be handled after they die. Require it to be repaid? Forgive the loan? Offset it with interest? Without interest?

A loan is not a gift; if you’ve spoken with a bank representative or a particularly pennywise relative.

In the article, a piece by Craig Reaves, past president of the National Academy of Elder Law Attorneys, a family had their mother’s estate plan in shambles. The culprit? A small notebook found under her bed. Apparently, there were many disagreements, but none so deep seated as those caused by the notebook. Why? Because it has a little ledger of the “loans” she had made to all the family members.

Some of the family members hadn’t received any money, but at least one had received $20,000. Other family members had repaid in full and some had not so much as begun to do so. This case raises an important question: To what extent does the amount of an unpaid loan get added to the decedent’s estate, and does it simply come out of each family member’s share in proportion to their loans?

One thing that’s clear, of course, is that the money is not gone and out of the estate. Why, it’s a loan and not a gift, after all. The second thing that’s clear is that the mother hadn’t thought about how these “loans” figured into her estate.

That family aside, it should be noted that any loan evidenced by a signed promissory note can become an asset in the estate. And, even if it’s a family loan, the promissory note has to be repaid.

An estate planner can ease this problem with a bit of foresight. For example, the loan can be forgiven, meaning they relinquish any expectation of being repaid. For that matter, too, the loan can be “offset” and thereby deducted from any assets made available through inheritance.

While there are a number of things that can be done, forgetting the loan is not one of them.

After all, the IRS is waiting just within earshot and has a trained eye to recognize the difference between a loan and a gift, as well as the additional tax burdens it can assign if it spots a gift or a poorly executed loan.

11/22/2011

The moral of the story is that in order for the plan to work you must have coordination between the attorney who prepares the plan and the accountant who will be preparing the relevant returns. If you don’t want to trouble yourself with what entity should pay what bill or accept what deposit, etc., let that piece be handled by your professionals, also, but again in an integrated manner. There has to be somebody who cares what account is used, because that is their job.

If you’re a fan of business law horror stories, then this recent article by Peter Reilly at Forbes and the case of Estate of Paul H. Liljestrand v. Commissioner should be both entertaining and instructive. The subject is the role of the Family Limited Partnership (FLP), an entity common to small business and estate law alike, and the problems that can be created.

You’ll need to read the story for yourself, as well as Reilly’s asides, but the bottomline wisdom is that an FLP, like any other business entity, exists on at least three fronts. First, what you do with the partnership itself. Second, the accounting system of money going in and out of the FLP. Third, and of utmost importance, the FLP is a legal entity with various requirements of which real honesty is essential.

To my ears, it sounds like the case above is a failure on all three fronts – it’s a mess – but Reilly identifies a disconnect between the accounting and the legal aspects to be the most fundamental downfall. In the end, the moral is to ensure you’re doing it right, or, as Reilly concludes:

The moral of the story is that in order for the plan to work you must have coordination between the attorney who prepares the plan and the accountant who will be preparing the relevant returns. If you don’t want to trouble yourself with what entity should pay what bill or accept what deposit, etc., let that piece be handled by your professionals, also, but again in an integrated manner. There has to be somebody who cares what account is used, because that is their job.

11/21/2011

If you’re in the fortunate position of deciding where to leave your millions or billions, take some advice from billionaire Warren Buffett’s son, Peter: Don’t spoil them.

It doesn’t take an experienced estate planner to say so, but “money is the root of all evil.” Unfortunately money bears with it the potential for good and bad ends alike. An experienced estate planner can help your loved ones lean to the positive when it comes to the inheritance you leave them.

When it comes to trust money, and inheritances in general, you need to find a balance that will help your children become the people you know they can be. For some solid tips, check out this article and the 5 trust fund rules to help children. The balance these rules help to create, as so aptly put by Warren Buffet, give your children “enough to do anything, but not enough to do nothing.” So, let’s review a few of the rules.

Carrots and Sticks. A trust need not just leave money; but it can be a tool. By building the appropriate provisions, you can offer certain tests and incentives to guide your heirs towards positive goals. You earned your money through hard work and, likewise, the trust can help foster similar lessons as you see fit.

Timing. The funds in a trust can be made readily available or made available over time, with or without incentive goals. After all, you might not want to lock a child into set goals (you might not know enough about which goals are appropriate for them), but you might want to keep their access to the funds at a pace consistent with their age and maturity. Generally speaking, such an approach generally is a solid bet. It can give a sense of security, without instilling laziness, too.

Money Isn’t Everything. In keeping with the above, consider using the conditions that surround the trust (i.e., your death) as an opportunity to provide your wisdom through your own letters or videotapes of success stories, so that the trust fund is opened as your words are received.

That’s only three of the five rules. For the other two, read the original article.

Regardless, the time to act is now.

The issues surrounding how to create the trust are worth mulling over, but just as important is the planning that goes into creating the trust and the correct timing to maximize its value. You can make good use of this timing given the present generous state of our estate and gift tax law, along with the currently depressed asset values.

Again, whether it’s thinking about the funds to put in the trust or the future of the inheritor, there’s no time like the present!

11/18/2011

The biggest rise [in poverty] occurred among people aged 65 and older who are being driven into poverty by out-of-pocket medical expenses, including premiums and co-pays from the federal government's Medicare program for the elderly.

It’s been fairly clear that medical expenses were becoming an immense financial drain on the elderly. If you are elderly or have an elderly loved one, then this is a given, as supported by recent census data.

As reported in Reuters, the number of poor persons hit a record high in 2010, and poverty rates among the elderly have had the steepest gain.

In fact, according to the census, a record 49 million Americans (i.e., 16 percent of the population) qualify as impoverished. When it comes to the elderly, the poverty level jumped to 15.9 percent, or roughly 1 in 6, from the previous year’s nine percent.

It’s true that the census study and methods have become a political flashpoint. However, the new analysis takes a broader look at life and includes government benefits. Previous studies used older methods that failed to account for how people maintained their standard of living.

Politics aside, it’s still a sobering data. If government benefits have become that much more of the equation, then it goes a long way towards showing what’s at stake in the present and upcoming political storms.

11/17/2011

[Qualified Charitable Deductions] can be used to satisfy the RMD requirement for the IRA owner. This means that the IRA owner who doesn’t need his or her RMD for income can direct the distribution to the charity of his or her choice.

If you would rather be a “voluntary philanthropist” versus an “involuntary philanthropist,” then you need to take action regarding the Qualified Charitable Deduction (QCD). In short, it’s a very powerful tool for both charity and reducing the tax liabilities associated with IRAs. However, on December 31, 2011, will we see it disappear?

Jim Blankenship at Forbes has recently pointed out that the very popular QCDs are not legally extended beyond 2011. As a result, we ought to take stock regarding whether the option will be around in 2012. As you may know, a QCD allows you to forgo taking your Required Minimum Distribution (RMD) by letting you redirect those funds straight to the IRS certified charity (or charities) of your choice. You can contribute as much as $100,000 per year.

It’s a pretty powerful tool for a “voluntary philanthropist,” if you don’t need the money from your IRA in the first place. Otherwise, taking the distribution just means more “T-A-X-E-S.” Note: Making this charitable beneficiary designation gives you an efficient way of contributing to charity and saving on your income taxes.

If you’ve taken advantage of the QCD this year, then you still have to ensure proper tax filing compliance.

Unfortunately, the only thing that can reinstate the Qualified Charitable Deduction is an act of Congress.